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Monday, 27 October 2008

Saudi Arabia sees launch of Islamic real estate

Saudi Arabia's Sumou Holding and Geneva-based Encore Management have launched the first Islamic Real Estate Investment Trust (REIT) for the Kingdom of Saudi-Arabia. This Saudi-Swiss joint-venture may change the real estate landscape in the GCC.

A Real Estate Investment Trust or REIT is a company which invests in real estate projects.

A REIT can be a publicly listed or privately owned entity.

Usually nine tenths of the rents of the REIT are distributed to its shareholders in the form of dividends, but the legal aspects of a REIT vary from country to country.

In the US the first REITs were launched in the1960s. In Europe, this innovative securitization has only recently been passed. The global REIT-volume is estimated at around $700bn.

Emerging asset class

Due to the real estate boom in the Middle East, REITs have attracted attention in GCC markets. REITs can also be structured in a Shariah-compliant way.

This put them in the limelight of global Islamic Finance. According to IIR, the organizer of Cityscape, there are an estimated $260bn worth of real estate projects in the Kingdom of Saudi-Arabia. This has motivated Geneva-based wealth manager Encore Management S. A. and the Sumou Holding from Al- Khobar, KSA, to establish the first Islamic REIT in the Kingdom. It is also the first REIT ever launched in the GCC country.

A lack of available Shariah-compliant products in all sectors (including financial markets and insurance) is considered to be a main obstacle in Islamic Finance. 'With the new REIT we will give not only wealthy investors a vehicle to benefit from the boom in the KSA real estate market, but also provide a Shariah-compliant instrument to retail investors', says John A. Sandwick, Founder and Managing Director of Encore and also a founding member of Cityscape, where the initiative was presented to the media for the first time.

'The common REIT-company will be established at the beginning of 2009 and registered in the DIFC. The name of the company is yet to be announced', says Ayedh Bin Farhan Al Qahtani, Chairman of Somou Holding.

Economic and religious benefits for the GCC

An Islamic REIT does not invest in a complex which plans to provide un-Islamic or haram services. This can be a supermarket selling alcohol, a hunting rifle store or a butcher stocking pork products.

While in Western countries, REITs are an attractive tax-vehicle because the proceeds are not taxed at the corporate level but at the shareholder's level, the benefits in an almost tax-free environment (KSA) are different.

John Sandwick: 'This is the first time that Saudi investors from all income levels have the opportunity to invest in different real estate projects without actually buying them. I know that the Saudis do not like the term, but our initiative is really revolutionary.'

The launches of the first Islamic REITs in Malaysia on May 15 2006 and in Singapore last August, both centres of Islamic Finance in Asia were also seen as revolutionary. Even in Germany, where the legislators approved REITs in 2007, Islamic REITs are now being developed. This will allow GCC investors to buy properties in Frankfurt or Munich (a popular place for Arab tourists) without contravening Shariah principles.


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